Commissioner of Income Tax vs Shantilal Keshavlal

R.C. Mankad, J.—The assessee is a HUF and the assessment year under reference is 1972-73, the year of account being Samvat Year 2027. The assessee-HUF was carrying on business of purchase and sale of gold and silver ornaments as well as bullion in the name of Shantilal Keshavlal. This business was taken over by a partnership firm consisting of (1) Chokshi Shantilal Keshavlal, karta of the assessee-HUF, (2) Chokshi Vinodchandra Shantilal, (3) Chokshi Rohitkumar Shantilal, and (4) Chokshi Krishnakant Shantilal on 10-4-1967. Deed of partnership was executed on 11-5-1967. All the four partners are coparceners of the assessee-HUF. Chokshi Vinodchandra Shantilal, Chokshi Rohitkumar Shantilal and Chokshi Krishnakant Shantilal are sons of Chokshi Shantilal Keshavlal, karta of the assessee-HUF. In other words, the assessee-HUF consists of father and three sons. The said partnership firm carried on business in the name and style of Chokshi Shantilal Keshavlal. Chokshi Shantilal Keshavlal, karta of the assessee-HUF, has 40 per cent share and his sons, Vinodchandra, Rohitkumar and Krishnakant have 20 per cent share each in the profit and loss of the partnership firm. The partnership firm applied for registration u/s 185 of the income tax Act, 1961 (''the Act''). The ITO assessing the partnership firm, however, held that partnership firm was not genuine and that the business, which was alleged to be carried on by the partnership firm, belonged to the assessee-HUF. The ITO, therefore, refused to grant registration to the partnership firm in the assessment year 1968-69 and in the income tax assessment of the assessee-HUF he included the entire income from the business, which was alleged to be partnership business, in the hands of the assessee-HUF in the assessment year 1968-69. In the subsequent assessment years also the ITO included the business income alleged to be belonging to the partnership firm in the total income of the assessee-HUF. The AAC having confirmed the view taken by the ITO, the assessee-HUF and the partnership firm preferred appeals before the Tribunal. The Tribunal in its common order passed in the partnership firm''s appeals for the assessment years 1968-69, 1969-70 and 1971-72 to 1973-74 held on appreciation of the evidence that the partnership firm was genuine and directed the ITO to grant registration to the partnership firm for the assessment year 1968-69 and to renew the registration for the subsequent years. The Tribunal held that under clause 4 of the deed of partnership all the partners had agreed to all the debts, assets and stock of the business of the assessee-HUF, which was taken over by the partnership firm and under clause 6 of the said deed net profit or loss of the partnership had to be divided in the manner laid down therein. The Tribunal further held that while Chokshi Shantilal Keshavlal, the karta of the assessee-HUF and his son Vinodchandra had contributed capital of the partnership firm, the other two partners, namely, Rohitkumar and Krishnakant, were working partners. Therefore, according to the Tribunal, the partnership was a valid partnership. In this view of the matter, it gave direction for registration of the partnership firm, as stated above. In view of the above direction given by the Tribunal, the income tax assessment was made on the partnership firm as a registered partnership firm.

Since the ITO held that the partnership was not a genuine partnership and that the business alleged to be run by the partnership firm belonged to the assessee- HUF, as observed above, he included the income earned from the said business in the hands of the assessee-HUF. The revenue''s contention was that 20 per cent share of each of the sons of Chokshi Shantilal Keshavlal belonged to the assessee-HUF and, therefore, the entire income earned from the business of the partnership is liable to be included in the hands of the assessee-HUF. The Tribunal, however, held that the partnership firm is genuine and granted it registration. In this view of the matter in the income tax assessment of the assessee-HUF for the assessment year 1972-73 it held that only 40 per cent share of Chokshi Shantilal Keshavlal, who was partner in the partnership firm as karta of the assessee-HUF, was liable to be included in the total income of the assessee-HUF. In other words, according to the Tribunal, 60 per cent share in the income of the said business belonging to Vinodchandra, Rohitkumar and Krishnakant was not includible in the total income of the assessee-HUF. The revenue sought reference and at its instance the following two questions have been referred to us for our opinion u/s 256(1) of the Act:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income of the firm of Shantilal Keshavlal was assessable in the hands of the assessee-HUF, to the extent of 40 per cent only?

If the answer to the above question is in the negative, whether the share earned by (a) Vinodchandra, (b) Rohitkumar, (c) Krishnakant from the firm of Shantilal Keshavlal or any of them is includible in the assessment of the HUF?

It is not disputed that the decision of the Tribunal holding the partnership firm of Chokshi Shantilal Keshavlal to be genuine and directing the registration of the firm has become final. The revenue did not seek reference challenging this view taken by the Tribunal. Once this decision had become final, it was not open to the revenue to seek inclusion of the 60 per cent share in the income of the business of the partnership belonging to Vinodchandra, Rohitkumar and Krishnakant in the hands of the assessee-HUF in the total income of the assessee-HUF. It is clear from the orders of the ITO and the AAC that the only ground on which they included the entire income of the partnership business in the total income of the HUF was that the partnership firm was not genuine. It is not the case of the revenue that even if the partnership firm is held to be genuine, shares which Vinodchandra, Rohitkumar and Krishnakant received from the business income of partnership firm belonged to the assessee-HUF. In other words, it is not the case of the revenue that Vinodchandra, Rohitkumar and Krishnakant were mere benamidars and their shares in the partnership firm belonged to the assessee-HUF. Under the circumstances, once partnership firm is held to be genuine, the shares of Vinodchandra, Rohitkumar and Krishnakant in the income of the partnership business cannot be included in the total income of the assessee-HUF.

Several authorities have been cited before us on the question whether the coparceners of HUF can become partners with karta of the HUF in a partnership firm. It was urged on behalf of the revenue that since Rohitkumar and Krishnakant had not made any contribution to the capital of the partnership firm from their own individual property, there was no genuine partnership. It was urged that the partnership firm would not become genuine merely because Rohitkumar and Krishnakant had agreed to contribute their labour and skill. It was pointed out that the partnership deed was silent as to in what manner the partners had to make contribution towards the capital of the partnership firm. The evidence on record reveals that Chokshi Shantilal Keshavlal, who was karta of the assessee-HUF and Vinodchandra had made contribution towards the capital of the partnership firm. However, since Rohitkumar and Krishnakant had not made any contribution to the capital of the partnership firm, it was urged, the partnership was invalid. Now all the above contentions, which are raised on behalf of the revenue, could be considered and the decisions, which are cited would be relevant only if the question arising before us is whether or not the partnership firm is genuine. However, no such question arises for our consideration in this reference. So far as present reference is concerned, we have to proceed on the basis that the partnership firm is genuine and it is duly registered. It is not disputed that the registration of the partnership firm is continued till 1983-84, the year in which it was dissolved.

The learned counsel for the revenue sought to rely upon the decision of the Chief Court of Sind in Kirpaldas Motandas v. CIT [1942] 10 ITR 505 in support of his contention that even if the partnership firm is held to be genuine, income derived from the business could be assessed in the hands of assessee-HUF. That was a case in which one Bhojraj, who was a partner in a firm - Hemandas Bhojraj, had a share of nine annas in the rupee. This firm, on an application made for registration, was registered by the ITO. The partners, however, were ordered to be separately assessed on the profits received by them and, when investigating the case of Bhojraj, the ITO came to the conclusion that although Bhojraj was a partner in the firm of Hemandas, he was a partner by reason of his utilisation of capital belonging to the joint family of which he was a member. The ITO, therefore, did not assess Bhojraj on the share of profits received by him in the business, but he assessed the joint family. The joint family contended that by registering the firm, the income tax authorities were stopped from further inquiring into the identity of the persons, who actually received the share of Bhojraj in the profits. This contention was, however, rejected. The joint family made an application u/s 66(3) of the Indian income tax Act, 1922. While dealing with this application, the Chief Court of Sind held that although a question of estoppel might be a point of law, the Commissioner could not be directed to make a reference inasmuch as it was a point of law to which the answer was very evident. The Court observed that there was no provision in the Act, which lays down that the registration of a firm operates to estop the income tax authorities from taxing assessees who actually receive the profits of the firm. In this view of the matter, the Court declined to direct the Commissioner to make reference as prayed for. This decision will be of no assistance to the revenue. In the instant case, it has not been found by the ITO that the shares of profit received by Vinodchandra, Rohitkumar and Krishnakant from the partnership belonged to the assessee-HUF. It is, therefore, not open to the revenue to urge that notwithstanding the registration of the partnership firm, the share income of Vinodchandra, Rohitkumar and Krishnakant was includible in the hands of the assessee-HUF.

Next decision on which reliance was placed by the revenue was the decision of the Bombay High Court in SHAPURJI PALLONJI Vs. COMMISSIONER OF Income Tax, BOMBAY., . In that case, the assessee who was carrying on business in partnership with his brother, introduced his son as a partner in the firm in November 1937 and gave him from his share of ten annas and eight pies, a share of four annas. The firm, as constituted, was registered by the ITO in 1938-39 u/s 26A of the 1922 Act and assessments were made on the firm and partners accordingly. Subsequently, in the course of reassessment proceedings u/s 34 in respect of the assessment year, 1938-39, the ITO found while proceeding u/s 23(5)(a) of the 1922 Act that the assessee''s son was a mere name-lender and that the entire profits representing the share of ten annas and eight pies actually belonged to the assessee. The Tribunal agreed with the finding of the ITO. In reference the Bombay High Court held that the ITO was not by reason of the registration of the firm u/s 26A prevented or estopped from taxing in the hands of the assessee profits representing the share of ten annas and eight pies. In the instant case, it is not the revenue''s case nor has it been proved that Vinodchandra, Rohitkumar and Krishnakant were mere name-lenders and their share in the income of the partnership business belonged to the assessee-HUF. That being the position, this decision has no application to the facts of the instant case.

As already observed above, the Tribunal has on appreciation of the evidence on record found that the partnership firm consisting of Chokshi Shantilal Keshavlal and his three sons is a genuine partnership. This finding of the Tribunal is a finding of fact, which cannot be disturbed in the present reference. But apart from that, the view taken by the Tribunal appears to be correct. There is sufficient evidence on record to show that Chokshi Shantilal Keshavlal and his son Vinodchandra had contributed towards the capital of the partnership firm whereas Rohitkumar and Krishnakant were working in the firm. We are, therefore, not inclined to take a view different from the view taken by the Tribunal.

In the light of the above discussion, we answer question No. 1, which is referred to us for our opinion, in the affirmative and against the revenue. Since the answer to question No. 1 is in the affirmative and against the revenue, question 2 does not survive. We, however, hold that share income earned by Vinodchandra, Rohitkumar and Krishnakant or any of them from the firm of Shantilal Keshavlal is not includible in the assessment of the assessee-HUF. Reference answered, accordingly, with no order as to costs.